All Forum Posts by: Armaan H.

@Greg Dickerson

Got it, but what if it was a ground lease? In that case, the tenant does it's own construction, right?

Also, how do you suggest I find out what tenants are willing to pay without disclosing the location? Are there lease comps or something?

@Account Closed

Based on the fact that the chain is growing in Chicago, but doesn't have a location in the immediate area. Property also fits Popeyes' site criteria in terms of size, traffic count, population, etc. 

Franchisee is interested in the area, but whether franchisee and corporate like particular location TBD.

@Joel Owens

Now this is great advice, thanks Joel.

You are correct that Popeyes' newer stores have drive-thrus. I'm banking on that it's NOT a must have requirement as it was Starbucks. 

The nearest Popeyes doesn't have a drive-thru, but seems to do a good amount of business. Based on average unit of sales of $1.3MM, Popeyes should be able to pay about $80K in annual rent. 

For new construction/new lease (10 years/NNN), I feel the final product can go for a 7.5% CAP rate given current interest rate environment.

A small time Popeyes franchisee is not of the same strength as a behemoth like Starbucks. But the Popeyes brand is a strong one, with an extremely low failure rate. Popeyes is still growing and Chicago is a long-time strong market for the chain. Popeyes is publicly traded under RBI, Inc., but corporate doesn't guarantee franchisee obligations. 

The franchisee will have to invest north of $1MM if he decides to move forward. Talk about having skin in the game. His investment will naturally increase the value of the currently-vacant lot. 

@Jeff C.

The contract is for full asking price. Its a placeholder until I can come up with a precise offer. Seller knows this. 

What kind of real estate investor are you if you don't expect me to negotiate?

How am I suppose to make an offer if I don't know what I'm working with? Maybe Popeyes is willing to pay only $40,000/gross lease. Kinda the point of DD. You think I'm gonna pay $600K if that's the case? 

If Popeyes agrees to $80K/NNN do you think I'll walk away from a 13%+ CAP rate?

So there's nothing sleazy here. Maybe I wasn't clear enough for you. If the seller doesn't like my revised offer, he can tell me to f*** off, and I'd be fine with that.

By the way, negotiating during DD was an idea I read in a BP discussion forum. 

@Greg Dickerson

I get where you're coming from, but I was burned a few years ago being too transparent. 

The local government of a town nearby owned a piece of property. Was still in college, so no money to pay professionals. Still, I was able to attract the attention of a national auto parts retailer. Talked with the regional real estate rep at the company. 

Then, one day, radio silence. Calls didn't get answered, voicemails didn't get returned. Same with e-mails.

A few weeks later, a sign at the property went up: "Coming Soon - Subject Auto Parts Retailer". 

Never heard from the guy/RE dept, but later found out the Village received an offer from a local RE developer affliated with the auto retailer. 

Saw the property on LoopNet a couple years later-- 20 year double-net lease. CAP rate of 5.5%. Asking was over $3 million.

Not sure if developer had construction costs or if ground lease, but Village sold the land for only $350,000. 

Potentially lost millions, but I don't blame myself for a second.   
 
  

@Dan H.

I told the seller the purchase was contingent upon receiving franchise approval. This is true, but I don’t think the seller realizes I won’t be the franchisee. Why should it matter? If I bothered to clarify, he could’ve gone directly to Popeyes, so not good for me. 

The franchisee is open to leasing, but doesn’t know that a buy option exists. But existing sign only mentions FOR SALE. I implied the land is mine, which I don’t think is unethical. Not sure he would be talking to me otherwise.

The seller was okay without earnest money. He’s not in a position to dictate terms since he’s nearly desperate to sell. His original price was $750K + demolition + soft costs. 

But he has proof of my funds...I’ve got plenty for a down payment. To be fair, I told him I would terminate the contract as soon as I know I can’t do the deal. 

How much is typical earnest money in a standard transaction?

Franchisee may very well want a CAP rate of 13-18% for himself. If he calls the RE broker, and the two sides wait until my DD period is up, they can legally do the deal without me obviously. The seller is obligated to me for 90 more days, but if the franchisee won't sign a lease with me, I can't move forward. What lender is going to finance a vacant piece of commercial land with no tenant commitment?

Plus the seller might try to weasel out of our contract— more money to the seller and less money for the franchisee if I get squeezed out.

Once I know that Popeyes is definitely interested, I can go back to the seller and say, $600K won't work, how about more like $450K? 

Didn't see any point in negotiating hard if Popeyes isn't ultimately interested. I already know what worst scanerio is and am using that in my financial assumptions. Any discount would be a cherry on top. 

@Greg Dickerson

The seller is under the impression I’m opening the franchise. The franchisee is under the impression that I already own the land. 

Plus I want the franchisee to sign a lease, not consider a purchase.

Also need franchisee to sign lease in order to get necessary financing. Don’t have funds to do an all-cash deal. 

About 30 days into my 120 day DD period. This is my first go at real estate development.

Anything more I can do to protect my interest?

Have been keeping an eye on some vacant land near where I live (Chicago, IL). Former auto repair shop. Current owner demolished the building and did a Phase I, which came back clean. Original plan was to build a Starbucks with a drive-thru, but the City didn't approve the special-use permit required after strong opposition from neighbors who were concerned about traffic congestion, pollution, litter, etc. 

Starbucks withdrew its plans because the proposed site was a relocation of an existing store nearby. Without the drive-thru, it wasn't worthwhile for the coffee chain. Not to mention bad PR. Owner is asking for $600,000, but the RE broker said the seller is definitely willing to negotiate. I can easily get for $500,000, if not $450,000.

Here's where things get interesting. There's a Popeyes franchisee that's looking to add more stores in the area. The guy operates about 3 locations in the area. The nearest Popeyes from the site is 5 miles, which is owned by the franchisee I'm referring to. I reached out and he said he would happily be a tenant if I find a location he likes.

Based on my quick-and-dirty analysis, fair market value is $80,000/year NNN ground lease. Conservative 6% of sales. The CAP rate would be at least 13%-18%. Wouldn't mind holding or flipping.

So I have a location and tenant identified. Property is under contract for full asking price (will negotiate once Popeyes approves site). 120 due diligence period with multiple contingencies. No earnest money, but showed partial proof of funds (which would be down payment to lender). 

Since there's a HUGE FOR SALE SIGN on the vacant lot, how can I prevent being bypassed when the franchisee is given the address to do a drive-by?